Buybacks are a $1 trillion political hot potato - here's why politicians and CEOs are sparring over them

Callum BurroughsFeb 7, 2019, 18:00 IST

Win McNamee / Getty Images

2018 saw record share buybacks by S&P 500 companies following the GOP's tax cuts with more than $1 trillion in stock bought back.

Bernie Sanders and former Goldman Sachs CEO Lloyd Blankfein have been feuding on Twitter about the value of the strategy ahead of potential Democrat plans to limit buyback options by corporations.

Other leading figures in US politics have weighed into the debate including Steve Mnuchin and Elizabeth Warren.

A US political debate over the roles of capitalism and government has spilled into a Twitter spat between US Vermont independent Bernie Sanders and the former CEO of banking Goliath Goldman Sachs.

At issue: Buybacks. A buyback is the term for the common practice when a company buys up its supply of stock that's available on the open market. When supply goes down, the demand, and thus the price goes up, making the owner of the stock richer and the company's market capitalization higher.

The debate about buybacks "will please those who worry about excessive financialization within the economy and enrage those who believe the companies and free markets are the best allocators of capital, not government," said Russ Mould, investment director at AJ Bell.

Why buybacks are in the news now

Many say it was a consequence, intended or not, of the Trump Administration's tax cuts in early 2018.

US firms took advantage of additional cash freed up, announcing plans to spend a record $1.1 trillion on stock repurchases in 2018.

Sanders and Senate Minority Leader Chuck Schumer said Americans should be "outraged." They wrote in a New York Times op-ed on February 3 that profitable American companies were "laying off workers while spending billions of dollars to boost their stock's value to further enrich the wealthy few."

And Democratic 2020 candidate Elizabeth Warren has introduced legislation called the "Accountable Capitalism Act" to limit the practice of buying back shares. She has said that the primacy of shareholders over executives "is a root cause of many of America's fundamental economic problems," including underinvestment and income inequality.

Economists and some in the financial community have fought back (one argument is that "worthwhile corporate investment and shareholder payouts" go hand in hand). And on Wednesday, Blankfein took to Twitter to jab Sanders about his critiques.

Buyback proponents say:

"If companies can't invest the capital productively, they return it to shareholders. That gives shareholders the right to invest it in other areas," Steven Mnuchin said on CNBC in response to the Sanders and Schumer op-ed.

Buybacks can be a sign that management feels a company's shares are undervalued, so any move to buy back stock can be seen as a vote of confidence in the firm's near and long-term trading prospects.

If a company is generating surplus cash it can return it to shareholders and let them decide what to do with it, rather than splurge it on an unnecessary acquisition or capacity increases.

The day before, Blankfein wrote: "A company used to be encouraged to return money to shareholders when it couldn't reinvest in itself for a good return. The money doesn't vanish, it gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad?"

Critics of buybacks say:

US legislation adopted after the Great Depression in the '30s barred companies from doing anything to manipulate their stock prices, which most companies interpreted to include buybacks. They were made legal again during President Reagan's administration.

Repurchases reward executives at the expense of staff and customers

There is also the risk that firms buyback stock using debt, potentially weakening their balance sheets and competitive position in the long term

US companies spent 140 times more on stock buybacks than wages, according to Sanders and Schumer.

"Their argument is that firms are lavishing capital upon buybacks at the same time as they lay off staff and restrain capital investment, when the Trump tax plan was designed to stimulate hiring and spending rather than financial engineering," said Mould.

Sanders and Schumer said companies should use those excess funds to pay workers a higher wage. They indicated that the party could look to implement new rules preventing corporations from initiating buybacks until certain conditions on workers' compensation had been met.

The op-ed included propositions such as a plan to limit buybacks unless a company hit certain requirements including paying $15 an hour to workers and providing seven days of paid sick leave.